Making Home Purchase Decisions: Understanding How Mortgages Work

Making Home Purchase Decisions: Understanding How Mortgages Work


Bag of Money

You’ve found the home of your dreams, but buying the home depends on securing financing. Recent news that lenders have tightened up their requirements has you a bit nervous; even borrowers with good credit are finding it more difficult to get a mortgage.

Although credit has been tightening since the sub-prime mortgage fiasco blew up earlier this year, you can still get a home mortgage. Let’s take a look at some mortgage essentials to help you get started as you search for the right home mortgage.

What is a Mortgage?

A mortgage is a debt incurred by homeowners by means of a loan made by a lender covering the purchase price of the home minus your down payment. It is a contractural agreement which allows the lender to repossess your home if you default on the loan.

The Three Part Obligation Process

When you seek mortgage lending there are three components to the loan:

Principal: the original amount that you borrow with an obligation to repay the amount over a set term.

Interest: a percentage amount that you agree to pay the lender for use of the principal amount until the full amount is repaid.

Term: the length of time (generally in months) to repay the loan amount .

Over the course of the first years of the loan, most of the money paid toward the loan is on the interest while during the last years of the mortgage term the bulk of the monies covers the principal.

A Matter of A, B, C and D

Four grades of loans are available: A, B, C, and D. Buyers with good credit can get conforming “A” loans which offer the lowest and most favorable mortgage rates. The lower your credit rating the lower grade loan you are eligible to receive. Lower grade loans carry a higher interest rate and approval is harder to come by. With many lenders suffering stiff losses following the sub-prime meltdown, it has become more difficult to get obtain a home mortgage.

Some Points to Consider With Home Purchase Loans

The amount of money you will need to borrow is based upon your purchase price minus your down payment. Many lenders want to see you put at least 20% down, but some will allow less which will increase your monthly mortgage loan payments. You’ll pay a higher interest rate as the lender assumes a bigger portion of the risk associated with the mortgage loan. You may also be required to carry Private Mortgage Insurance (PMI) which will tack on a monthly charge to your payment.

Escrow is funds set aside by the mortgage company and paid by you to cover home insurance, taxes, and other expenses related to your home.

Points can be charged in order to secure a lower interest rate. For every point charged, you will be expected to pay 1% of the home’s purchase price at closing.

Closing Costs are paid to cover title search, attorney fees, taxes, documentation, and any other fees associated with the sale of the house. This burden falls on the buyer, but it can be negotiated with the seller or the bank may reduce or forego their portion of the costs related to the mortgage.

Finally, some loans will penalize if you pay off your mortgage fast; check the contract closely to learn what your obligations are and use mortgage calculators to compare the various mortgages available to you.


end of post idea


Helpful article? Leave us a quick comment below.
And please give this article a rating and/or share it within your social networks.

facebook linkedin pinterest

Amazon Affiliate Disclosure: is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to The commission earnings are used to defray our cost of operation.

View our FTC Disclosure for other affiliate information.

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".